The Regulator Says Insurance is Broken

Hi, I'm Monica Hallon and this is my podcast Let's Talk Money. Every Friday a new episode will drop that gives you a snapshot analysis of one money-related topic that has meaning in your life. And then I answer your money questions. My hope is to put you on the path to financial stability and freedom. So let's talk money. Last week something quite amazing happened. I think listeners of this podcast would know that for a very long time and in fact it's been more than 15 years. I've been asking very simple questions of the insurance regulator and the insurance industry. Which is why is it so difficult to make insurance work in the interest of the policy holder. It is our rupee which makes the entire industry and distribution and profits and bonuses and junkets and everything go around. But why is it that I feel as if I've been cheated, lied to, defrauded and my don't claims don't come through? I don't know what I'm buying. I don't know what the product can actually do. Tell me what will the rate of return be? Tell me what does it cost to exit early? What does the health insurance policy actually cover? What are all the tricks and traps embedded in it? What are the chances that my claim will be paid? Why is it that persistency of life insurance is so low? Less than half the policies sold complete even five years and these are policies for 10, 15, 20 or whole life, 99-year policies. Why is the person selling me these policies can earn very high commissions? But has no responsibility once the sale is done? So banks will say, oh, that person moved away. As if the bank carries no responsibility. And honestly for all these years asking these questions was treated as proof that I did not know insurance. The standard response used to be the consumer has to do their own due diligence. If you bought the wrong policy, well, perhaps you should have read the fine print. I mean, who can read 100 pages of legalese? This is why the IRDA consultation paper of September 23 is quite remarkable. The paper is in the show links. If you want a link to the consultation paper, it is there. Because what has happened is for the first time the regulator itself has put out data that lays bare some of the problems in the way insurance is sold. And IRDA is actually proposing changes to address them. And after years and years of saying, and this was also the regulatory thought within IRDA for many for two decades, it's been like this, where insiders into the regulator would say that the consumers are the problem because they don't understand regulator. Now is saying, perhaps the way the system is designed has something to do with the problem. Finally, I mean, finally, they have come to this thing that it's a design problem of the way the industry is set up with the distributor tail wagging the dog and really gouging out the customer in a million ways. So for the regulator to say this is a big shift. But remember, this is a consultation paper. These are just proposals. They are not final rules. There'll be a lot of debate. A lot of blood will be shed and tears will be shed. Lobbing has started. There is huge pressure to dilute what is in this paper. But if it's implemented, this could actually mark the beginning of a very important reset in the Indian insurance industry. And honestly, this is going to be good. Finally, for the industry and the distributors because the way the industry is set up today, it is unsustainable. So what IRDA did was very clever. It's just put out data which the industry cannot refute. And using the data, it's making the case that things need to change. What is this data telling us? Really uncomfortable stuff. The cost of running the insurance business is very, very high. In life insurance, the cost of doing business from your premium, how much of the money goes into just running the business. It's almost 40% of the premium. In general, insurance, it's gone up to 48% so half of your money is going into sales commissions and costs linked to that sale. You know, the cost of the insurance, the protection is not even in this. The mortality underwriting cost is not even in this cost. It's extra. So no wonder what happens is a large part of the premium is consumed by the machinery of selling. And then, of course, on top of it, are other costs of running the business. Rather than this money going towards the fundamental purpose of insurance, which is paying claims, generating returns when the product is, it has an investment component and covering the legitimate costs of providing the service. It doesn't do that. It takes much more. Mutual fund industry, how much does it cost to run the business? It's about at most, it's around two and a half percent of the assets under management. Now, comparing premium and AUM is unfair, but really from your investment of 100 rupees or 100 rupees goes to work minus a very small stamp duty, which the central government collects. The industry doesn't get any part of your mutual fund investment as a sales charge. All of that is in trail, but in insurance, we are giving numbers on premium because that's how the data is set up. The first proposal is to bring out overall expenses of running the business. IRDA is saying, let's cap the expenses of management in life insurance at 15 percent within two years and 12 and a half percent within five years. For general insurance, these are 25 percent within two years and 20 percent within five years. So, can you imagine if these are the limits that IRDA is proposing and there's such a problem with this? Can you imagine what the agents are collecting today? If a 20 percent cap, a 25 percent cap is resulting in such a lot of problem that in itself is evidence of what they are gouging out from you. Out of 100 rupees of your premium, 25-1/4 is going as a sales commission of a cost of doing business. Consumer's point of view, I would say that this glide path of five years is too long. We have technology, we have data, we have the regulatory infrastructure, I don't see why we can't implement this in six months. Because I have noticed that if you give the industry five years to bring down costs, you also are giving it five years to continue operating with these costs. So, this needs to happen much faster. The second big proposal is commission. So, the first was the cost of doing business and the second is commission. This is important because the agent is really the person who faces you and explains the product to you. Unfortunately, in 2023, the previous regulator removed any cap on commission. He said, "Here is the expense of management limit and we will remove caps of commission and we've seen what's happened to expense management." And then the numbers are telling a very interesting story. So, 2023, the then insurance regulator removed caps on commissions. Between that time and 25, the premiums of corporate agents in life insurance grew by 28%. So, corporate agents like banks and companies, not individual agents, but corporates who are selling you insurance. Their premium grew by 28%, but the distributor payouts grew by 125%. In general insurance, premiums through brokers grew by 37%, while the commission payouts grew by 173%. Motor insurance, I think, is the most shocking. Premiums grew by 34%, commissions grew by 259%. So, every time you bought a car and they forced a motor insurance on you, you know why they've done that? Because my god, look at the way these commissions are grown. So, if the person who's selling the product gets paid substantially more for selling one over the other, you have to ask who is the seller working for the customer or the commission. Obviously, the commission. So, IRDA wants to bring back commission caps. The proposed maximum can go up to 25%. So, it's very complicated. There are many sublimates, different things, but the maximum in the industry is 25%. Remember, this is actually higher than what the 2023 regulation had done away with. But yet, it is a very high number, but yet the direction is correct, which is let's put a cap on commissions and over the years, we will squeeze it more and more and move the industry to a trail-only model. And more important for me in this paper was not just the value of the commission, but the intent of the consultation paper. What is it trying to do? It's trying to make the seller responsible for the sale. This is a fundamental change. Because till now, they just sold anything and disappeared. The proposals include disclosure of how much commission they are paid. They include tagging the sales person to the policy. So, at least there is some traceability of who sold you what nonsense. And then, they attempt to define what constitutes a miscell. If a regular premium policy, which means a policy where you pay premium every year, this geniuses sell it as a single premium. So, you go to them and they pretend that this is a fixed deposit, which is giving you higher return. And it's a one-time cost. It's only next year you figure out that no, this is a regular premium policy. And if you don't pay the second premium, you've lost your first premium because cost of surrender is a hundred percent in this strange product right so what is a missale if a regular premium policy is sold as a single premium it's a missale if the customer is not properly properly told about the costs of exiting a policy early what I just said if you exit within a year you get nothing back I mean what sort of roulette machine is this that you lose every is it a gamble or is it a financial regulated financial product these things are important because the insurance industry has a very strange separation between selling and servicing the incentive is only to collect the premium not to service the policy not to see if the product is suitable because insurance is so complicated actually the consumer needs somebody to help them understand the product remain invested when appropriate and service the policy and help with the claim I don't think anybody has agents who have helped with claim at least not in the especially not with the banks so your individual agent might be there but I mean try getting service out of a bank sales person who's sold you this doubt of an insurance policy I think at the heart of this consultation paper it's trying to move insurance distribution from a system that rewards premium collection towards one that makes the seller accountable for the quality of the sale this is absolutely key the pushback of course has become there are letters there are meetings there are calls to Delhi there presentations some of them generated by AI explaining why the proposed changes will hurt the industry it'll hurt the agents it'll hurt the businesses nobody is talking of the consumer just remember in all this noise being generated on banks crashing because of these regulations because regulatory overreach not other than ndtv profit I don't think any other channel has looked at the point of view of the consumer it's all about the industry and we know obviously why they do that because the ad money comes from there we've heard for many many years about the impact of regulation on companies distributors agents but I think it's dying that our voices are heard if you're a policy holder if you are a consumer there is something very practical you can do today IRDA has invited comments from public and policyholders on this consultation paper it is not a place to give your misscelling experience but I think relevant to what they're trying to do so if you do have a story which is relevant in brief you can put that down if you've been misspelled bad experience if you have a suggestion for the regulator I'm leaving a link in the show notes for the consultation paper you can send your suggestions page 73 is where the number of questions are there question one and question 32 is probably what is relevant to most of you because rest of it is fairly technical so do take a look and please give your views to the regulator because the consultation paper is asking for feedback and this is open till October 25th so we've just for too long the conversation around insurance has been about selling more policies not about what has happened to the people who have bought those policies I think we have to talk about suitability of sales selling the right policies at the right price with the right incentives and somebody accountable when the sale goes wrong and somebody to be standing there when it's time for claim this consultation from IRDA is a very important step in that direction so this is as I see it not the end this is just I think it marks the change in stance of a regulator who I have always called an industry association it's more looking after the interests of the lobbying industries the distributors rather because consumers have no voice right we're all disaggregated there is no voice first time IRDA is looking at the industry from the point of view of the consumer which I think should be celebrated I honestly hope that the conversation doesn't get captured and the government has the ability to not blink at all the lobbying which has started so I'm going to move to questions now this person wanted her name to be hidden so she writes dear ma'am thank you for your books and podcasts I have started my investment journey only after reading your first two books which gave me clarity I am 34 years working in a PSU I am currently living in my husband's parents house it's a small house my husband has one brother so the inheritance will be insufficient I want to purchase a plot or a villa I have saved monthly for gold in a money market fund for two years I have created a good lump sum amount of the fund the problem is I have not been able to find a good plot or a villa to purchase should I withdraw the money in pocket in VPF what would be a correct way to park this money my other doubt is if I keep saving in debt funds should I save in debt funds or invest in equity because what if the price after my retirement is very high so dear friend honestly to live in your own home on your own terms is a dream most women living in joint families in India have I completely get it the dream of your own home is good but you need to put down far more specific targets when do you want to move out how much will the new home cost is your husband on board with this decision if you're not moving out in the near future and are planning this for your own retirement then please use an equity index fund to target the coppers I think you're wanting to buy now and keep for the future I don't think you're moving out right now from the tone of your meal so if it is far into the future you set a monthly target for that future goal and if it is more than 10 years away as it seems to me it is please start with a simple equity index fund build complexity as you go along a money market fund is useful in within the next two years not for anything longer so please put a time horizon and then choose an appropriate product then there's no bus from Bodhucherry who says respected man greetings I became a fan after reading your books let's talk money and let's talk mutual fund I'm an engineer aged 54 and have least knowledge about finance and your book induced me to learn finance nevertheless I don't want my daughter she's in first year of engineering to ignore finance I want her to understand at age 18 she's earned 55,000 rupees as a reward of excellence for her achievement in 10th and 12th standard I want her to invest this so that she understands the methodology and practice of investment profit is secondary but learning is primary wow fantastic novice I humbly request you to guide and can you also suggest a fee only Rai in Chennai or Pondi I would like your guidance so novice I'm so delighted that you've begun your journey and even happier that you want your daughter to be financially independent and empowered the achievement award is such a great validation for your daughter's excellence congratulations wonderful please start her off on let's talk money and then let's talk mutual fund just let her begin with her understanding of cash flow systems and she's an engineer I'm sure she will understand this even better I actually will be soon coming out with an online course and put the links here on this show but if she finds that let's talk money reading is not enough she could possibly do that course as well let her begin with a simple index fund on the nifty 50 or sense x she can start small and then build confidence look your question about recommending a planner I don't do any recommendations whether it's a planner or a fund you will have to do the same due diligence you do to find a doctor or a lawyer talk to people ask for recommendations from your friends extended family a range for meetings with at least three if the things that they say are far away from what I write in the book find somebody else and here is wishing you and your daughter a wonderful rich money journey ahead I was there's Avinash from Jaipur who says I'm looking for suggestions on how to meaningfully invest windfall bonus I'm looking to invest the large coppers received for around one and a half to two years by the time I search for a flat or a house I intend to purchase I aim to safeguard the principle beat inflation and I'm hoping to find the property I'm looking for I am in the highest tax bracket so fd's don't make sense so Avinash unfortunately there isn't a product that guarantees an inflation and tax positive return over a two-year horizon you can get lucky if the real returns on bank deposits are high but it's really a matter of luck at what point you're investing I think you can look at a category of money market mutual funds with a growth option and buy direct to hold your money but other than that anything that gives a higher return will come with higher risk also remember at this point we are entering a higher interest rate cycle so do not buy a longer dated fund because they might show higher returns right now but that is last year's return this will be very risky stake conservative with the money market fund try and do the deal ASAP so that your money is deployed faster wishing you happy hunting for a home and that's a wrap for today I enjoy answering your money questions remember I don't look at individual portfolios, I don't recommend products. Look upon the space as a place to ask strategy questions, doubts and just basic things that you might not understand. Each time you have a good money outcome, I feel that I have one. To make sure that you don't miss an episode, press follow and help your friends get money smart by sharing a link with them. You can reach out to me at [email protected], that's Monica with the K. Tag my social media handles at the rate Monica Hallon and finally remember that you should have money and money should not have you. So let's talk money again soon, bye.